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Why Abenomics will work


Joseph Stiglitz


Japanese Prime Minister Shinzo Abe’s program for his country’s economic recovery has led to a surge in domestic confidence, and on the share marker. But to what extent can “Abenomics” claim credit?

Interestingly, a closer look at Japan’s performance over the past decade suggests little reason for persistent bearish sentiment. Indeed, in terms of growth of output per employed worker, Japan has done quite well since the turn of the century.

With a shrinking labor force, the standard estimate for Japan in 2012 – that is, before Abenomics – had output per employed worker growing by 3.08 per cent year on year. That is considerably more robust than in the United States, where output per worker grew by just 0.37 per cent last year, and much stronger than in Germany, where it shrank by 0.25 per cent.

Nonetheless, as many Japanese rightly sense, Abenomics can only help the country’s recovery. Abe is doing what many economists (including me) have been calling for in the US and Europe: a comprehensive program entailing monetary, fiscal, and structural policies.

Abe likens this approach to holding three arrows – taken alone, each can be bent; taken together, none can.

The new governor of the Bank of Japan, Haruhiko Kuroda, comes with a wealth of experience gained in the finance ministry, and then as President of the Asian Development Bank.

During the East Asia crisis of the late 1990s, he saw firsthand the failure of the conventional wisdom pushed by the US Treasury and the International Monetary Fund. Not wedded to central bankers’ obsolete doctrines, he has made a commitment to reverse Japan’s chronic deflation, setting an inflation target of 2 per cent.

Deflation increases the real (inflation-adjusted) debt burden, as well as the real interest rate. Though there is little evidence of the importance of small changes in real interest rates, the effect of even mild deflation on real debt, year after year, can be significant.

Kuroda’s stance has already weakened the yen’s exchange rate, making Japanese goods more competitive. This simply reflects the reality of monetary-policy interdependence: if the US Federal Reserve’s policy of so-called quantitative easing weakens the US dollar, others have to respond to prevent undue appreciation of their currencies. Someday, we might achieve closer global monetary-policy coordination; for now, however, it made sense for Japan to respond, albeit belatedly, to developments elsewhere.

Monetary policy would have been more effective in the US had more attention been devoted to credit blockages – for example, many homeowners’ refinancing problems, even at lower interest rates, or small and medium-size enterprises’ lack of access to financing. Japan’s monetary policy, one hopes, will focus on such critical issues.

But Abe has two more arrows in his policy quiver. Critics who argue that fiscal stimulus in Japan failed in the past – leading only to squandered investment in useless infrastructure – make two mistakes. First, there is the counterfactual case: How would Japan’s economy have performed in the absence of fiscal stimulus?

Given the magnitude of the contraction in credit supply following the financial crisis of the late 1990s, it is no surprise that government spending failed to restore growth. Matters would have been much worse without the spending; as it was, unemployment never surpassed 5.8 per cent, and, in throes of the global financial crisis, it peaked at 5.5 per cent. Second, anyone visiting Japan recognises the benefits of its infrastructure investments (America could learn a valuable lesson here).

The real challenge will be in designing the third arrow, what Abe refers to as “growth.” This includes policies aimed at restructuring the economy, improving productivity, and increasing labor-force participation, especially by women.

Some talk about “deregulation” – a word that has rightly fallen into disrepute following the global financial crisis. In fact, it would be a mistake for Japan to roll back its environmental regulations, or its health and safety regulations.

What is needed is the right regulation. In some areas, more active government involvement will be needed to ensure more effective competition. But many areas in which reform is needed, such as hiring practices, require change in private-sector conventions, not government regulations.

Abe can only set the tone, not dictate outcomes. For example, he has asked firms to increase their workers’ wages, and many firms are planning to provide a larger bonus than usual at the end of the fiscal year in March.

Government efforts to increase productivity in the service sector probably will be particularly important. For example, Japan is in a good position to exploit synergies between an improved health-care sector and its world-class manufacturing capabilities, in the development of medical instrumentation.

Family policies, together with changes in corporate labor practices, can reinforce changing mores, leading to greater (and more effective) female labor-force participation. While Japanese students rank high in international comparisons, a widespread lack of command of English, the lingua franca of international commerce and science, puts Japan at a disadvantage in the global marketplace. Further investments in research and education are likely to pay high dividends.

There is every reason to believe that Japan’s strategy for rejuvenating its economy will succeed:  the country benefits from strong institutions, has a well-educated labor force with superb technical skills and design sensibilities, and is located in the world’s most (only?) dynamic region.

It suffers from less inequality than many advanced industrial countries (though more than Canada and the northern European countries), and it has had a longer-standing commitment to environment preservation.

If the comprehensive agenda that Abe has laid out is executed well, today’s growing confidence will be vindicated. Indeed, Japan could become one of the few rays of light in an otherwise gloomy advanced-country landscape.

Joseph Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University.

Copyright: Project Syndicate, 2013


  • This is not analysis, there has never been a time in the known history of the world when excess debt did not cause economic havoc. I suppose the Nobel people give out awards to anyone these days...oh yes Obama the peacemaker.

    Date and time
    April 11, 2013, 11:38AM
    • Absolutely agree. Nowhere in the article does Mr Stiglitz mention what an inflation rate of 2% if achieved, would do to interest rates, ability of the government to service the debt, the impact on JGB prices, impact on the banks holding them etc. Like all extreme left-wing economists, Mr Stiglitz can see no wrong in governments taking on enormous debt (as if the Eurozone's problems were not a clear enough example). They just don't want to think about how the debt can be repaid. That is why Mr Stiglitz supported Australia borrowing and wasting billions on pink batts, the BER and $900 cheques spent on plasma TVs. Given the strong left-wing bias of the Nobel Committee, being awarded a Nobel prize (other than the physical sciences) just means you are in the left-wing camp.

      Date and time
      April 11, 2013, 12:19PM
    • Many have predicted "economic havoc" for Japan due to its large government debt. Hasn't happened. Won't happen. If you believe it will, the onus is on YOU to explain why 20 years of data is wrong.

      Stiglitz provides well reasoned analysis, supported by empirical fact, and is one of the better mainstream economic commentators.

      I suppose you prefer the uninformed, unscientific austerity-rants that Fairfax unfortunately has a habit of occasionally publishing (see Michael West's laughable article yesterday about RBA operations, for example).

      I prefer to read pieces grounded in empiricism and reality, rather than frothy baseless hypothesis.

      Date and time
      April 11, 2013, 12:37PM
    • AK everything is inter-connected so Japan's actions are not something that is happening in isolation. "Beggar thy neighbour economics" is called by other names one being "currency wars".
      The Keynesians for the moment are holding sway but History has shown that Debt ultimately wins the debate. It is inelastic and in 2007/8 it went passed the the "snap back". Since then we have had The Fed, The BoE, The ECB and now The BOJ hit the print to eternity button kicking te can like there will be no tomorrow.
      I wrote to a Friend and associate the other day about Systems and why they fail quoting some relevant lines from Jurassic Park:
      • “Living [to include Man-made] systems are never in equilibrium. They are inherently unstable. They may seem stable but they are not. Everything is moving changing. In a sense everything is on the edge of collapse.”
      • "Increasingly the Mathematics will demand the courage to face its implications.”
      Global Economic business is now in full play and it is a race to the bottom and the Maths of using Debt to fix a Debt problem is like putting out a fire with gasoline.
      This will end badly!!!

      Date and time
      April 11, 2013, 1:52PM
    • Yep, excess credit and super low interest rates penalise savers and benefits debt holders.
      History is pretty clear on what devaluing fiat money and allowing non-productive profits will do to an economy...usually war or rebellion is the result, but always misery for the worker.
      There is also the effect where more money is forced into chasing returns so the carry trade and share market boom, but no actual growth takes place.
      In Australia we have seen a large cohort benefit from house inflation to the detriment of younger buyers, renters, and future productive investment (due to lack of investment in *industry* that makes things).
      We also have a financial sector that is almost 30% of GDP which is should be the grease, not the machine itself!
      With this much wealth re-distributed from productive savers to extractive (I win, you lose) wealth vacuums it is no mystery why the global economy is on the precipice.
      As for the "last 20 years were uneventful therefore shut up" argument...this is the argument of a farmer at the base of Mt Vesuvius...right for a while, until the inevitable tragic event. Successful can kicking is no substitute for sound money and real reward for effort!

      Date and time
      April 11, 2013, 1:54PM
    • AK - Err.... did you know that Japan has been suffering from deflation for the last 20 years? Do you know what proportion of Japan's GDP is required just to pay interest on government debt if interest rate went up from 0.5% to 2% as Mr Abe is planning? I believe the onus is on YOU to understand the Japanese economy before placing blind faith in thinking that just because something has not happened in the last 20 years, it will not happen in the future. You must also believe that property prices in Australia will never go down substantially. Do you also understand why economics is called the "dismal" science? So don't claim Stiglitz is providing "empirical fact". I think you don't know the difference between reality and the "world that economists live in".

      Date and time
      April 11, 2013, 2:11PM
    • @hbloz

      "Err.... did you know that Japan has been suffering from deflation for the last 20 years?"
      Yes, which is precisely the OPPOSITE of what the anti-debt brigade says will happen. We are constantly told that high government debt will lead to hyperinflation and high interest rates. In Japan is has led to precisely the opposite. Therefore the "mainstream" wisdom - which does not understand monetary operations - is wrong.

      "Do you know what proportion of Japan's GDP is required just to pay interest on government debt if interest rate went up from 0.5% to 2% as Mr Abe is planning?"
      Abe is planning to push INFLATION to 2%, not interest rates. Interest rates are fixed at whatever the Japanese central bank wants them to be fixed at.

      "I believe the onus is on YOU to understand the Japanese economy before placing blind faith in thinking that just because something has not happened in the last 20 years, it will not happen in the future."
      It is easily understood if you bothered to research, which you haven't. Abe is planning to increase government spending which he hopes will stimulate demand and aid in private sector deleveraging. And it will. How efficiently it happens is down to the design and target of his stimulus.

      Date and time
      April 11, 2013, 4:22PM
  • @hbloz, nice reply, the left-wingers always seem to think that money is endless. As if the government can just keep creating it...the total debt of Australia (Government, Private and Corporate) sits at well over 300% of our GDP. Greece went broke on 274% for the same figures...when confidence goes the trouble will start...

    Date and time
    April 11, 2013, 12:38PM
    • Hello dear economic genius,
      are you aware that Mr Abe is not exactly a left-wing, communist debt lover?

      "...seem to think that money is endless. As if the government can just keep creating it." As a matter of fact governments can just keep creating money. And it seems the only ones who are aware of this and who are constantly using this capability are the too-big-to-fail-banks. On this point I recommend to do some reading about the GFC which most Australians do not understand because it didn't really happen here.

      And by the way: People who are incapable of commenting on economic analysis without using the terms left-wing or right-wing should rather comment on cooking receipes.

      Date and time
      April 11, 2013, 1:29PM
    • Les
      - Countries that have their own currency CAN just keep creating it. Greece is stuffed because its tied to the euro.
      - So we have total debt in Australia well over 300% of GDP - how much of that is Govt versus Private and Corporate? and what was the relevant breakdown for Greece? What is your point here exactly? That the private sector and corporate sector can be just as bad at making malinvestments then what right wingers say Government will be?

      Right wingers - privatising profits and socialising losses since 1834

      "I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the Bank. ... You are a den of vipers and thieves."
      —Andrew Jackson, 1834, on closing the Second Bank of the United States;

      Date and time
      April 11, 2013, 1:42PM

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